This article was originally published in Business Standard, May 07, 2024; Co-author: Kavil Ramachandran
The recent trend of ownership
restructuring and vertical splits amongst prominent Indian family businesses,
exemplified by the division within the Godrej Group, has brought to the
forefront the complexities and challenges associated with managing large,
multi-generational enterprises. While opting to split the business may appear
as a strategic manoeuvre to navigate differing visions and aspirations within
the family, it necessitates a thorough examination of both the potential
benefits and drawbacks. This article delves into a comprehensive perspective on
family business divisions, scrutinizing both the motivations propelling such
decisions and the adverse consequences they may entail at both familial and
corporate levels.
The Positive Aspects
Complexity of Managing Large
Conglomerates: As family businesses expand and diversify, managing the
intricate web of operations and stakeholders becomes increasingly challenging. Formations
of smaller clusters, each having its own strategic business units, allows for
streamlined management structures and clearer accountability, leading to
enhanced efficiency and agility in decision-making. For instance, the Adi-Nadir
and Jamshed-Smita clusters will enable the entities to focus on their core
competencies and strategic priorities, driving operational excellence and value
creation in their respective sectors.
Unlocking Value and Growth
Potential: A split can unlock the individual value and growth potential of
different business segments. Specialized focus allows each entity to tailor
strategies, attract specific talent, and pursue targeted investments,
ultimately leading to greater success and profitability. The division of the
Godrej Group into separate entities controlled by different family members
should enable each cluster to capitalize on their respective strengths and
market opportunities, drive innovation, and value creation.
Accommodating Growth and
Aspirations of the Family: As family businesses expand across generations,
differing opinions on strategy and management can arise, leading to conflict.
Dividing the business offers autonomy to individual branches, fostering
ownership and accountability while reducing discord. For example, the Birla
Group split allowed each faction to pursue independent growth, leveraging
diverse skills. Additionally, younger generations may seek opportunities
aligned with their interests, driving innovation. For instance, the Bajaj
Group's diversification into finance empowered the next generation to pursue
their entrepreneurial vision.
Learning from Past Experiences:
Observing the challenges faced by other business families during succession or
disputes can serve as valuable lessons. Proactively choosing to divide the
business allows for a planned and amicable transition, ensuring the
preservation of family relationships and the brand's reputation. The Bajaj
family's decision to split the Bajaj Group into separate entities facilitated a
smoother transition of leadership and ownership, mitigating the risk of future
legal battles and reputational damage, while preserving the family's unity and
legacy.
Ownership and Rewards: A
strategic and amicable split within a family business can enable individuals to
have greater "skin in the game" and receive rewards commensurate with
their contributions and aspirations, ultimately fostering harmony and
prosperity within the family. The Mittal family, for example, founders of the
Mittal Steel Company, decided to amicably split the business to align ownership
with individual aspirations and rewards.
Moreover, the division of the
business not only aligns ownership with individual aspirations and rewards but
also serves to minimize politics in decision-making processes. By
decentralizing control and empowering each cluster within the family, quicker decision-making
is facilitated, eliminating the need for seeking approval from numerous
stakeholders.
While the preceding discussion
highlights reasons that motivate families to split, it's essential to recognize
that divisions entail inherent risks and complexities too. Below, we discuss
some negative impacts of splitting.
Unintended Downsides
Loss of Synergy and Economies
of Scale: A unified conglomerate often benefits from synergies between
diverse business segments, leading to cost efficiencies, shared resources, and
heightened bargaining power. For instance, the Tata Group's diversified
portfolio leverages synergies across industries, bolstering its competitive
edge and financial performance, including a cohesive brand identity. However,
the division of such conglomerates, as seen in the case of the Ambani family's
split of the Reliance Group and the TVS group, risks diluting these synergistic
advantages, thereby impacting profitability and competitiveness.
Potential for Family Conflict
and Rivalries: While division may aim to address existing disagreements or
differing aspirations within the family, it can inadvertently give rise to new
challenges and rivalries between the separated entities. The battle between two
hero group entities, post the split, regarding the use of the brand name
‘Hero’, highlights the potential for discord arising from family business
divisions. Such conflicts can impede decision-making processes, hinder
strategic alignment, and erode shareholder value.
Challenges in Succession
Planning and Leadership Development: Staying unified provides access to a
broader talent pool, both from within the family and externally, ensuring
continuity and strength in leadership across the organization. The Murugappa
Group's robust leadership development programs serve as a prime example,
facilitating seamless succession planning and talent pipeline management across
its diverse business verticals. However, splitting the business may curtail
these opportunities, making it more challenging to ensure a seamless succession
process and maintain robust leadership across the separated entities.
Emotional and Cultural Impact:
Family businesses often pride themselves on strong cultural identities and
shared values that underpin their success. The Murugappa Group exemplifies this
with its deep-rooted cultural ethos of trust, integrity, and entrepreneurship,
which has fostered a cohesive organizational culture and sustained business
performance over generations. However, division poses a risk to this unity and
shared purpose, potentially leading to emotional challenges and a loss of
cultural cohesion within the family.
Growing Wealth Disparity:
Past business splits have revealed that while divisions may start out
equitable, over time, one faction often amasses more wealth and resources. For
example, the Ambani brothers' feud over the Reliance Group's assets led to a
significant wealth gap between Mukesh and Anil Ambani. These disparities can
fuel family tensions and perpetuate financial inequalities, highlighting the
socioeconomic impact of family business divisions.
Harmonizing Family and
Corporate Choices
In navigating the complex terrain
of family business divisions, it becomes imperative to acknowledge the nuanced
interplay of motivations and consequences. While the prospect of splitting a
conglomerate may offer avenues for addressing immediate challenges and
accommodating evolving aspirations, it also entails significant risks and
losses, both at the familial and corporate levels. The case studies of
prominent Indian business families, such as the Ambanis, Birlas, and Munjals,
underscore the intricate dynamics and far-reaching implications of such
divisions, ranging from wealth disparities to emotional upheavals.
By embracing a proactive stance
towards addressing emerging challenges, family conglomerates like Godrej could
potentially have emerged as global powerhouses, wielding not just economic
influence but also shaping the broader political and societal landscape.
However, by choosing to split, these conglomerates risk diluting their legacies
and missing out on transformative growth opportunities. Ultimately, the path
forward for family businesses lies in striking a delicate balance between
tradition and innovation, unity and autonomy, to ensure sustained success and
relevance in an increasingly competitive global landscape. We can only hope
that the sum of the parts is eventually greater than the whole, in numbers, as
well as in family harmony, togetherness, and impact.
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